Prescription, Procrastination, and Personal Liability for Corporate Debts

“I have heard that in war, haste can be folly, but have never seen delay that was wise.”
— Sun Tzu, The Art of War

Debt recovery can feel very much like a battle. Creditors often face evasive debtors, mounting legal costs, and drawn-out proceedings that sap both time and resources. Yet South African law delivers a stark warning to creditors who hesitate: delay can be fatal to your claim.

The reason is prescription. With limited exceptions, most debts prescribe after three years, meaning they become legally unenforceable. What appears to be a generous window can close surprisingly quickly — especially where fraud, complex corporate structures, or incomplete information obscure the true facts.

At the same time, the law recognises that prescription has limits. A recent decision of the Supreme Court of Appeal (SCA) demonstrates that, in the right circumstances, claims against company members or directors may survive well beyond three years, particularly where personal liability and concealed wrongdoing are involved.

Prescription in South African law: the general rule

Prescription is governed by the Prescription Act 68 of 1969
https://www.gov.za/documents/prescription-act-68-1969

In broad terms:

• A “debt” prescribes after three years unless a longer or shorter period applies
• Prescription generally begins to run when the debt becomes due
• A debt is not “due” until the creditor has knowledge of:
  • the identity of the debtor, and
  • the facts from which the debt arises

A creditor is deemed to have such knowledge if it could have acquired it by exercising reasonable care.

This framework is designed to balance certainty for debtors with fairness to creditors. But where fraud, concealment, or complex corporate misconduct is involved, determining when prescription begins can be contentious.

The case that tested the limits of prescription

Allegations of fraud involving a close corporation

In the case before the SCA, a Trust sued the sole member of a close corporation (CC) on allegations that she, her CC, and her husband (the bookkeeper and accountant, later deceased) had orchestrated a sophisticated six-year fraud.

The allegations were that:

• the husband, acting as bookkeeper for both entities,
• caused fraudulent payments totalling approximately R21.8 million
• to be made to the CC through fictitious transactions

The member denied wrongdoing, but the scale and duration of the alleged scheme were substantial.

How the Trust uncovered the claim

The Trust only became involved after it took over the affected company. Upon review, it identified suspicious transactions and appointed auditors and forensic investigators.

Crucially, however:

• the forensic investigation raised suspicion but did not provide full proof
• it was only during a subsequent insolvency inquiry into the husband’s estate
• that the member admitted receiving monies and produced bank statements
• which ultimately underpinned the Trust’s claims

After approximately R12 million was repaid, the Trust sued for the remaining R9.8 million.

The two claims against the CC member

The Trust advanced its case on two legal bases:

1. Personal liability under the Close Corporations Act for being party to the reckless or fraudulent carrying on of the CC’s business
2. Delictual liability for damages as a co-wrongdoer together with the CC and her husband

Before engaging on the merits, the member raised a prescription defence, arguing that the claims were more than three years old and therefore unenforceable.

The High Court agreed — but the Trust appealed.

Why the Close Corporations Act claim had not prescribed

The SCA drew an important distinction.

The claim for personal liability under the Close Corporations Act 69 of 1984
https://www.gov.za/documents/close-corporations-act-69-1984

was held not to be a “debt” for purposes of prescription in the usual sense.

The Court reasoned that:

• personal liability for reckless or fraudulent trading
• only arises once a court declares the member personally liable
• until such a declaration is made, there is no “debt due”

Because no court had yet made such a declaration, prescription had not even begun to run in respect of this statutory claim.

Why the damages claim also survived prescription

The damages claim required a different analysis.

The SCA reaffirmed the principle that:

A debt is not due until the creditor knows the identity of the debtor and the material facts giving rise to the debt, or could have acquired that knowledge through reasonable care.

Although the forensic report raised red flags, the Court found that:

• suspicion alone was insufficient
• the Trust only obtained actionable knowledge during the insolvency inquiry
• the bank statements and admissions then enabled a viable claim

Because the Trust issued summons within three years of acquiring that knowledge, the damages claim had not prescribed.

The Trust was therefore entitled to proceed to trial in the High Court.

The real lesson: procrastination still carries serious risk

This case offers relief to creditors — but it should not be misunderstood.

The outcome did not excuse delay. On the contrary, the Trust narrowly avoided losing its claim altogether and was forced into:

• extensive forensic investigation
• an insolvency inquiry
• multiple layers of litigation

All just to preserve its right to be heard.

Had the facts emerged slightly earlier — or had the Trust delayed issuing summons — the result could have been fatal to its case.

Practical guidance for creditors and businesses

1. Treat prescription as a strategic risk, not a technicality

Prescription is often raised as a first line of defence. Creditors should assume it will be used aggressively and plan accordingly.

2. Investigate early and thoroughly

Where fraud or corporate misconduct is suspected:

• appoint forensic investigators without delay
• secure documents, bank records, and electronic evidence
• identify all potentially liable parties

Early investigation can be decisive in stopping prescription from running.

3. Understand personal liability risks in corporate structures

Members and directors may face personal exposure where they are involved in reckless or fraudulent trading. This is particularly relevant in insolvency scenarios.

For guidance on enforcement and recovery options, see
Corporate Insolvency and Liquidation
and broader strategy under
Commercial Litigation.

When should you seek legal advice?

You should obtain legal advice immediately if:

• you suspect fraud or misappropriation of funds
• significant time has already passed since the loss occurred
• corporate structures or insolvency are involved
• personal liability of directors or members may arise

Early advice can mean the difference between recovering millions and losing the claim entirely to prescription.

Disclaimer
The information provided herein is for general information purposes only and should not be used or relied upon as legal or professional advice. No liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance on this information. Legal outcomes depend on the specific facts and applicable law. Always consult a qualified attorney for advice tailored to your circumstances. You may contact our attorneys here to discuss your specific matter.